Cougar Oil & Gas: Ready for a Bloodbath?

by Aaron Wise - 2/1/2011 8:35:53 AM

Despite the bullish claims -- and the wild price targets – showcased in paidpromotions for Cougar Oil & Gas Canada (OTC: COUGF.OB), the company cannot overcome the powerful forces of reality. In short, the hype looks a whole lot prettier than the following ugly facts.

COUGF has recorded no significant changes in its oil production over the course of the past year, while the company’s stock has inexplicably tripled in price during that same period. Nevertheless, COUGF promoters – hired as part of a massive six-figure publicity campaign -- have issued price targets that call for the stock to rocket even higher, soaring as much as 1,000% or more, despite the speculative gains it has already enjoyed.

Without those promotions, COUGF looks like an odd candidate for such a breathless rally. For starters, COUGF is actually owned by another company that has been operating at a deficit for years and needs emergency financing in order to survive. Moreover, COUGF itself is a cash-starved company that plans to use dilutive equity-based financing to cover its own business expenses going forward.

Given that troubling set of facts, TheStreetSweeper offers these words of caution: If you have purchased COUGF shares (or considered doing so), you should first determine just how much that investment is really worth. It just may be a little less than the $7.25 -- or the even higher $62 -- price target you saw on the promotional tout sheet that landed in your mailbox.

TheStreetSweeper decided to evaluate COUGF on its own using standard measures applied to other players in oil and mining industry. Using the $1.55 share price recorded on the date of COUGF’s latest audited financial statements – a price that has more than doubled to $3.35 since that time – the stock looks wildly inflated based on every single one of those measurements.

For example, on average, oil/mining companies trade at roughly three times their book value. Even at half its current price, however, COUGF boasted a price-to-book ratio of 124 – or 41 times the industry average – instead.

Similarly, a typical mining company trades at about 4.3 times its total sales. COUGF boasted a price-to-sales ratio of 36 (with its stock at $1.55), however, one of the highest such ratios documented in the entire industry.

The disparity seen in yet another metric, price-to-cash flow, proved even more striking. The average Canadian oil exploration-and-production company trades at 12.1 times its cash flow. COUGF once again stands out from the crowd, with a price-to-cash flow ratio (again based on a $1.55 share price) of an incredible 47,936 instead.

Even a favored measurement tool for young exploration companies like COUGF, known as “risk-adjusted net worth analysis,” yielded convincing evidence of an overpriced stock. Using this metric, COUGF looks like a company worth no more than $2.20 a share – and likely worth around $1.90 instead – even after factoring in generous oil prices and optimistic increases in the company’s reported reserves.

COUGF has managed to record only two minor accomplishments over the course of the past year. Specifically, the company has reactivated a pump – which boosted its oil production by a whopping 15 barrels a day – and executed small, incremental optimizations to other pumps it controls.

COUGF’s joint-venture mining property is located within the Northern Sunrise County area of Alberta, Canada.TheStreetSweeper recently conducted an online search for COUGF job openings in this area, but failed to uncover any signs of job opportunities there. It then attempted to contact most of the government staffers in this county – a few dozen people total – about any signs of COUGF activity there, but is still waiting to hear back from them more than a full week later.

The story of COUGF’s Trout Area property, located in the “Municipal District of Opportunity No. 17,” sounds very similar and – if anything – even worse. In this case, too, COUGF never shows up in job announcements covering a full business directory for the area. Moreover, TheStreetSweeper learned, another oil company recently rushed to abandon its own activities in that same region.

Last year, Fortune Energy grew so fed up with a large property located near COUGF’s own operation that it attempted to sell it as nothing more than a single block of land. The quick timeframe of this transaction, coupled with Fortune’s apparent lack of interest in maximizing the sale price by dividing up the land, could signal possible problems with the mining region that COUGF also occupies.

TheStreetSweeper attempted to contact 20 government officers and business owners in this mining area as well. It fielded only two responses, both offering no comment, and is still awaiting feedback from the rest.

TheStreetSweeper issued its flurry of emails after reading through the lengthy promotional material on COUGF and reaching the following conclusion: COUGF has engaged in little, if any, activity that would actually transform the company. Despite all the hype – featured in emails, flyers, blog posts, research reports and promotional videos – COUGF looks almost like the same company that it was a year ago. It has done nothing more than survey some properties, shuffle some papers, carry out some extremely minor improvements to a few oil pumps – and watch its stock triple in price.

COUGF has exposed this lack of progress through its own press releases. The following overview contains every major announcement issued by the company over the past 12 months, with only a few insignificant (or repetitive) headlines excluded from the list for the sake of space.

Jan. 24, 2011: COUGF completes minor preparations for surveying land and – in perhaps its biggest accomplishment to date – arranges financing for the company.

There you have it -- a full year of operations at COUGF, as reported by the company itself. In 12 months, COUGF has taken only a few important steps toward actually extracting oil from the ground. It reactivated a pump that added 15 barrels to its daily production, carried out incremental improvements to its existing pumps and increased its land holdings by less than 2%. Otherwise, as noted earlier, the company has done little more than shuffle papers, execute some structural and management changes – and record a 300% jump in its stock price.

Kodiak: Double Exposure

COUGF counts Kodiak Energy, a bleeding company that controls more than 64% of its outstanding stock, as its biggest shareholder by far.

For its part, records show, Kodiak is an exploration company that spends all of its revenue (and even more, via debt) on projects that may – or may not – yield profits down the road. Put another way, records indicate, Kodiak bleeds cash and has yet to achieve consistent profits throughout its history in the exploration business.

Way back in 2007, Kodiak saw its own stock soar to record highs – topping $3.75 a share – on hopes that its exploration projects would soon generate profits for the company. As the years passed (and the cash disappeared), however, investors lost their confidence.

At the end of 2009, records show, Kodiak had achieved net oil production of barely 125 barrels per day. Throughout that year, as its actual mining operations dwindled, Kodiak resorted to stock-promotion campaigns in an effort to maintain investor interest in the company. By 2010, however, most long-term investors bailed as the stock fell below 10 cents a share.

Years later, once the last fading hopes for profitability had all but disappeared, debt-swamped Kodiak finally decided to come clean with investors. Here is a sample of corporate comments – reflecting that newfound, if painful, honesty – from the company’s most recent quarterly report:

“It has been difficult to raise equity financing for such purposes in the last 24 months … We tried very hard for many months to arrange financing during those difficult times … The severe turn down in gas prices over the past year has made natural gas projects difficult to show returns on investment … The company actively sought partnership in the development; however, the deteriorating economic factors made this very difficult … Our total assets decreased.”

For COUGF investors, however, this Kodiak disclosure should sound the loudest warning bell of all: "The company is in the process of raising additional financing in its Cougar Oil and Gas Canada Inc. subsidiary that will provide financing to carry out its business plan through 2010."

In other words, based on its official regulatory filings, Kodiak will use its ownership power over COUGF to raise the emergency funding necessary to finance its own operations for the 2010 fiscal year. This represents a dog-eat-dog scenario: Two companies, both of them bleeding cash, are basically eating each other’s shares for debt in order to survive for one more quarter.

So what can these two companies do about this ongoing cash burn? The solution looks troubling at best. Because profitability remains well over a year away for COUGF and depends largely upon government-controlled mining leases and the unknown costs of high-risk horizontal and oil sands – and because profitability looks barely conceivable for Kodiak at this point – the companies can pump up their stock prices. Based on the promotional campaigns summarized below, that is exactly what the companies decided to do.

Six-Figure Publicity Stunt

StockPromoters.com provides a unique – and valuable – resource for microcap investors by recording the compensation received by third-party promoters for increasing investor awareness of penny-stock companies.

To date, StockPromoters.com has listed 21 different promotions for COUGF on its website. While some promoters have pumped COUGF for free (including Jim Van Meerten, who still looked somewhat conflicted because of his beneficial ownership of COUGF stock at the time of his Dec. 31 tout), others have pocketed generous fees for their services. Take a look at some of the more notable cash payments, as well as their recipients, outlined below.

$51,000: Lake Group Media, an outfit connected to Business Financial Publishing that has disclosed that “its employees and affiliates may own, or may purchase and sell, securities of the company or companies profiled” – which basically indicates that it could be selling COUGF stock at the same time that it is promoting it to the public

Up to $50,000: Evergreen Marketing, listed as the recipient of $1,000 to $50,000, with its subsidiary – The Green Baron Report – pocketing $4,500 of that sum

$33,500: Emerging Markets Consulting, paid from Lake Group Media, which is linked to TGR Group

$22,600: StockGuru -- which can be connected to sgurunews.com, Raincity Marketing Group and Pentony Enterprises – and, through one of its aliases, received an undisclosed amount from a $300,000 COUGF promotion and another $8,600 in cash

$8,500: SpeculatingStocks.com, which also owns of RockingStocks.com and – like Emerging Markets Consulting – received payment from Lake Group Media

$7,500: John Person, a stock promoter who was compensated with funds from a $300,000 COUGF publicity campaignorchestrated by Toprank Marketing and who has reportedly confirmed his personal involvement in this advertising effort

Timothy Sykes, a millionaire stock-trading educator who specializes in “shorting” (or betting against) risky penny stocks, met Person face-to-face at the 2010 Trader’s Expo in Las Vegas. Since then, Sykes has personally confirmedthat Person received $7,500 for pumping COUGF from Toprank Marketing under its $300,000 promotional campaign for the company.

Unfortunately, in most cases, investors face a difficult – if not impossible – task when attempting to determine the exact sums received by stock promoters who often operate under multiple aliases and effectively hide their connections to others involved in the publicity campaigns. Therefore, some cash payments may actually overlap (with StockGuru’s receipt of several different amounts for touting COUGF -- $8,600, $22,600 and some portion of $300,000 – standing out as a possible example).

Still, investors can at least take note of the largest amount reported in any one disclaimer. That way, even though the overall compensation listed for stock promoters may exceed the largest sum identified in a single disclaimer, investors can (if nothing else) determine the MINUMUM value of the advertising campaign. Thus, in the case of COUGF, they know that promoters have received $300,000 – under a single campaign – to publicize the company’s stock.

They have issued some bewildering price targets for COUGF in the process. For example, in a promotional video that surfaced on Jan. 12, Person – a self-proclaimed author and television personality – pegged the future value of COUGF at $7.25 a share. He cited a 2010 appraisal carried out by Ernest Schlotter, another COUGF bull, when justifying that target. In the audio from that videotape, Person then indicated that Schlotter has some company by stating that “analysts” (as opposed to one analyst) have announced a $7.25 price target on the stock.

Analysts rarely agree on a price target, certainly one that matches down to the last cent. Moreover, despite an exhaustive online search, TheStreetSweeper failed to uncover any other analyst with a $7.25 target on COUGF’s stock. This suggests one of two possibilities: Either Person was lying, or another analyst at Schlotter’s firm simply agreed with Schlotter’s own target.

Meanwhile, TheStreetSweeper found only one other price target issued for COUGF throughout its extensive review. Andrew Carpenter, identified as a “global investment analyst for the Asia Business & Investing newsletter, established a price target for COUGF that totals an astounding $62 a share. To hit that price, COUGF would need to record additional gains of more than 1,000% going forward.

Notably, when issuing his $62 price target, Carpenter mentioned that his firm (IC Strategic Communications) received $250,000 for promoting COUGF’s stock. This important disclosure, found in an almost-illegible fine-print disclaimer, has been rendered as an image – rather than text – so that it cannot be detected through traditional Google word searches.

COUGF Printing Press

As investors may have guessed by now, COUGF faces several important roadblocks that could wreck the stock long before it reaches the $7.25 target – let alone the $62 target – issued by promoters paid to recommend the company’s shares.

The current officers of COUGF, identified as veterans of the industry, must recognize these obstacles themselves. They boast past experience with oil sands extraction, for example, so they should know that this technique ranks among the most environmentally damaging – and also the least profitable – forms of oil extraction in the conventional mining business. They have also grown familiar with the process of oil mining on Native American land (home to COUG’s own assets), including the armed disputes that have been staged by local residents who do not appreciate the resulting contamination to their drinking water or the destruction of their wildlife.

Most importantly, however, they understand the need to raise equity-based financing -- and lots of it.

A familiar story, typical with so many heavily promoted stocks, seems destined to repeat itself here. Time and again, bleeding microcap companies have hyped up their share prices with plans to dilute those shares by issuing new stock and selling it for cash. It should therefore come as no surprise that COUGF needs to keep its stock price up so that, when it sells new shares at a discount, that markdown will actually attract investors to the company.

Corporate debt buyers have little interest in buying notes that cannot be repaid, with interest, in full. Thus, in the case of COUGF, the strategy appears to be clear: The company must do everything possible to maintain a high share price until it can complete this equity-financing deal and ensure that new debt buyers receive deeply discounted stock in the process.

TheStreetSweeper contacted COUGF in an effort to obtain information about the company’s future plans for stock dilution or equity-based financing. COUGF declined to comment on its plans for dilutive (or toxic) equity financing, however, beyond mentioning that it has secured loans – of up to $3 million – to cover initial expenses associated with projects that are scheduled to begin this month.

To be clear, despite its understandable reluctance to discuss the matter, COUGF will almost certainly dilute its shares. Too many parties – including the company, its majority shareholder and at least one of its bullish analysts – have already highlighted this plan, as illustrated in the statements collected below, to suggest otherwise at this point.

On Jan. 10, 2010, COUGF’s top executive stated: “It is anticipated the ($3 million) credit facility will be paid off using the proceeds from a planned equity financing.”

In its most recent quarterly report, Kodiak (COUGF’s majority shareholder) stated: “In the event that additional capital is raised at some time in the future, existing shareholders will experience dilution of their interest in the company or the company’s interest in the subsidiary (COUGF).”

Meanwhile, in his full research report, Schlotter stated: “To reach its full potential, Cougar needs approximately $25 million in CAPEX (capital expenditure), which will be financed through a line of credit and by selling common shares of the company.”

The picture cannot get any clearer than that. COUGF and Kodiak both need cash desperately, and they will leverage existing shares – or print new shares altogether – in order to get it.

Investors may wonder: Just how cash-starved can a company – celebrated in roughly $500,000 worth of stock promotions – really be? The answer is short: Very. At the time of its most recent financial statement, COUGF had just $2,000 in “cash and cash equivalents” listed on its balance sheet. That bank account looks awfully empty to cover the operating expenses for an entire company.

TheStreetSweeper tried to secure more information from COUGF about its meager cash balance as well. It received this reassuring, if somewhat inexplicable, update from the company: COUGF is now generating positive cash flow of roughly $400,000 a month that, after debt payments and overhead expenses, leaves the company with about $150,000 a month to cover its actual operations in the field. If so, COUGF has managed to clear almost twice as much in PROFITS as it had previously recorded in REVENUES for the most successful months in the company’s entire history.

To be fair, TheStreetSweeper acknowledges that COUGF may have undergone some positive changes that could improve the picture painted by the company’s most recent financial statements. TheStreetSweeper understands that oil prices have risen about 15% since COUGF issued its last financial report, for example, and that the company has executed incremental (and therefore unreported) improvements to existing oil wells that could have provided a modest boost to its production rate.

But COUFG has suggested a major turnaround, requiring more than minor increases in oil prices and production, with those numbers. By claiming that it is now generating $400,000 in cash flow per month – when it had previously reported no more than $215,000 in total revenue per month – COUGF has created some reason for skepticism, to say the least.

Meanwhile, putting that matter aside, COUGF has raised another interesting question: How could the company even operate with just $2,000 in the bank? Was it counting on a big check in the mail? If so, records indicate, the company would need to spend that – and then some – on its own outstanding bills.

COUGF listed $420,000 in “net receivables” on its latest balance sheet. That money, while clearly welcome, would still fall well short of the $1.928 million in accounts payable documented in that same report.

COUGF also estimates the total value of its major assets (property, plant and equipment) at $9.2 million, a price tag that would likely drop by more than half if the company wound up selling those assets through a liquidation process. That number is almost matched by $8.9 million in actual liabilities, a sum that would fall little – if any – under a similar scenario.

This exercise brings us back full circle to the same nagging questions. Where are COUGF and its majority owner (Kodiak) going to get the cash they need? And why would COUGF – a company with just $2,000 in the bank – become the celebrated subject of a massive six-figure stock promotion campaign? The answers signal serious trouble ahead.

When COUGF leverages or dilutes its shares with massive amounts of debt – and statements by the company and its backers virtually promise as much – ordinary investors are bound to lose. Those who want more proof should simply review the latest news on the company. In short, the dilutive financing has already begun.

On Jan. 24, records show, COUGF announced that it had used stock warrants and a $3 million collection of loans to secure an undisclosed amount of initial financing to cover the first stages of a drilling program that’s scheduled to begin in the middle of this month. Naturally, COUGF stopped short of disclosing the actual terms of this financing arrangement and instead stated that those details will be “provided upon closing” of the mysterious deal.

Even now, however, this much is clear: COUGF has already kicked off its equity-based financing plans – which could prove toxic and dilutive going forward – and needs to follow up with similar, but even bigger, fundraising efforts in order to survive through the current year.

In closing, TheStreetSweeper would like to end with a brief summary of the battered stock charts of other cash-starved microcap companies following dilutive equity financing deals. First Liberty Power (OTC: FLPC.OB) soared past $1 a share ahead of a spring 2010 fundraiser, plummeting immediately afterwards, and now trades for just 40 cents a share. Oxigene (Nasdaq: OXGN) fetched more than $1 a share before selling 60% of the company for $7.5 million, also in the spring of 2010, and has since plunged to just 20 cents a share.

American Sierra Gold (OTC: AMNP.OB) rocketed toward $1.50 in the fall of 2009, when the company diluted its stock to raise $6 million, and has since spiraled to only 3 cents a share. Finally, U.S. Dry Cleaning (OTC: UDRYQ.PK) commanded more than $3 a share several years ago before carrying out multiple dilutive financing deals that left its stock trading on the lowly Pink Sheets for just a single penny a share.

For its part, COUGF has already completed the first – and prettiest – part of that familiar journey. If history serves as any guide (not to mention all of the fundraising discussion highlighted above), the company could soon follow those other companies down that dangerous path and ultimately plunge right off of a cliff.

* Note: No member of TheStreetSweeper’s staff or advisory board has ever taken a financial position in COUGF or received compensation from others with positions (short or long) in the stock. To contact Aaron Wise, the author of this story, please send an email to aaron@solear.org.